What are the Differences Between PPF and ELSS?

Both Public Provident Fund (PPF) and Equity-Linked Savings Scheme (ELSS) are very popular tax-saving options. Both these products are eligible for a deduction of INR 1.5 lakh as per section 80C of the Income Tax Act.

However, apart from being the two best tax-saving options, these products do not have much else in common. The difference between these starts right at the fundamentals—the investment philosophy, the asset class, and most importantly, the risk and returns associated with the investment.

ELSS vs PPF

Here are five differences between ELSS and PPF

1. Lock-in period

Every tax-saving option comes with a certain minimum lock-in period during which you are unable to exit your investment. The first point of difference between ELSS and PPF is the lock-in period associated with both investments. Since both products qualify as tax-saving investments, both have a lock-in period condition. It is three years for ELSS and 15 years for PPF.

You are not allowed to redeem your units in ELSS funds for at least three years from the date of purchase. In case of PPF, you must stay invested for at least 15 years. Partial withdrawal is permitted from your PPF account after a period of five financial years. Another difference between ELSS and PPF is that the latter allows you to borrow against the accumulated corpus.

2. Investment amount

You can start investing in both ELSS and PPF with an amount as low as INR 500. ELSS plans have no minimum amount condition and no cap on the maximum investment amount. However, you must invest at least INR 500 in your PPF account during each financial year. Furthermore, the maximum amount of investment in PPF is restricted to INR 1.5 lakh per year.

3. Fund allocation

A very important difference between PPF and ELSS is the assets in which the corpus is invested. PPF funds are completely invested in government securities, which are backed by the Government of India. In case of ELSS, a majority of the corpus is invested in equity and related securities. PPF is geared towards offering stable returns and maximum security of funds, whereas ELSS aims to maximize returns on investment.

4. Risk and returns

PPF funds, as discussed, are invested in government bonds. This means that the only risk associated with PPF investments is the risk of default by the Indian Government, which is an unlikely event. PPF is, therefore, one of the least risky tax-saving investments in the market today. Less risk means lower returns, which is true for PPF investments as well. These investments generate a fixed interest per year at a rate of interest based on the 10-Year Government Bond Yield. It is similar to the interest rates offered by banks on fixed deposits with a five- to ten-year maturity period.

On the other hand, ELSS funds do not promise a fixed rate of return and are subject to the risk of price fluctuations. However, equity as an asset class, has always outperformed traditional investments, especially PPF. The Compounded Average Growth Rate (CAGR) of PPF returns for the last ten years works out to be roughly 8.2%, while that of popular ELSS is around 17%.

An important factor to be considered when we talk about returns is inflation. The primary objective of any investment is to deliver positive returns post inflation. The trouble with fixed income securities like PPF is that they seldom deliver returns that are higher than the prevailing rate of inflation. As a result, the future value of your money may erode making the investment unprofitable.

5. Professional management

Another difference between PPF and ELSS is that qualified fund managers professionally manage the latter. The fund managers regularly adjust the composition of investments to ensure optimum returns. The equity market is so dynamic that regular monitoring of investments is very important for ELSS. On the contrary, PPF is a fixed-income security with a singular focus on government securities that does not require a dynamic involvement of fund managers.

From the above comparison, it is clear that ELSS beats PPF in every comparable investment factor like lock-in period, potential returns, liquidity, and flexibility. Selecting the best investment product for your portfolio is crucial.

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